Wednesday, October 14, 2015

Tough times in the oil industry right now

As layoffs become the energy industry’s main response to low oil prices, a handful of producers are aiming to trim personnel costs without pink slips by spreading the pain among their employees.

Companies including Occidental Petroleum Corp. and Canadian Natural Resources Ltd. are employing hiring freezes, caps on bonuses, and even across-the-board wage cuts to preserve jobs. They and others that already have reduced payrolls—including many drilling and well servicing firms—are reluctant to slash further, say energy-industry experts.

In part, they’re trying to avoid the type of skilled worker shortages that followed mass job cuts in prior downturns. But it’s also because their businesses can’t succeed without sufficient staff, especially if the downturn in oil prices reverses course....

...The last time Occidental disclosed large staff layoffs was in 1998, when it shed hundreds of jobs and cut its head-office workforce by half. That was during another period of mass layoffs in the oil industry stemming from low crude prices and consolidation.

Those cutbacks led to a dwindling number of petroleum engineers followed by what some described as a “lost generation” that left the energy industry exposed to shortages of high-skilled professionals a decade later.

“Everybody that went through this before all knows it really hurt oil companies in terms of not having a generation ready to move into management positions,” said Dan Hill*, who heads Texas A&M University’s petroleum engineering department. As students graduate, “We’re encouraging companies to hire them as technicians for half of what they’d earn as petroleum engineers,” he said...

Best wishes to folks in the oil industry; wage cuts and job loss are no fun. I wonder when pharma will take a lesson from the oil industry?

*It is worth noting that Dan Hill has been featured on the blog before, back when West Texas Intermediate was going above $100 a barrel ($46/barrel today) and he was warning their undergraduates that the petroleum engineering field was cyclical. Well done, sir.

As I recall there were posts on this blog about 2 years ago how hot Petroleum Engineering could be, but letters from school departments suggesting students not to get too excited. Things change fast in this industry.

This raises an interesting conundrum. Would you take a pay cut in order to save the jobs of someone you worked with? Hypothetically:

-You are single-You live in an expensive hub (SF or Boston)-You get along fairly well with everyone you work with

You're asked to take a 10% pay cut to save jobs. Enough to hurt you financially, but not cripple you. Would you do it to save someone's job? What about 5 jobs? 10? At what point are you being a good samaritan vs a sucker? Obviously there's a lot more variables that confound this issue, but I find myself wondering if this is a better solution than just outright laying staff off.

Given the industry mantra "it is not you, it is just business" I would be willing to do business like that. This means I would take a 10% cut once and maybe twice. I would need something in return, though, like some guarantee of continuing employment for some reasonable time (5 years? for each cut?).

"Would you take a pay cut in order to save the jobs of someone you worked with?"

It's a lot easier to answer that question if you consider that someone that you work with is also 'you'. If the company says that they need to downsize due to falling profits, but the employees are good, then it's basically a lottery and even if you think you're a good worker, you're don't wan to take that small chance that you'll lose your job and not someone else.

It's human nature to not take the small chance in that case. Just like I wouldn't drive a car that had a 1% chance of exploding on the highway every year, or if someone gives you a 10000 bucks and says all in for a 50% chance to win ten thousand more, or you can keep what you got, most people will keep what they got. In this case, better to spread out the pain than to risk being the guy who is fired. Most employees are fine with this type of thinking.

Collective pay cuts makes sense in a cyclical business that is expected to increase in the future. I would place oil in this category, despite knowing that at some point the planet will run out (which will drive revenues, for a time): supply seems OK 30 years after 'peak oil'.

While collective pay cuts seems nice, I don't know that it makes sense for all industries. For example, in drug discovery if we assume that all the easy drugs have been made (no idea if this is true) I'd think it would behoove the industry to get rid of the, let's charitably say 'b-players', and pay the better performers more. Finding new oil is getting harder, but once you've found it extracting it (AFAIK) is constant. The opposite almost appears to be true in pharma: finding new drugs is getting harder but physically making once you have is getting easier.

The pharma business is also somewhat cyclical at least for a younger company. It does take years to develop a project from an idea to a sellable candidate. In the first cycle companies will build up discovery, then scale it down and build up development. The cycle is even more gruesome in a rare case when the same company decides to go all the way to market (and survives). Idec with Rituxan was an example of that scenario.

These cycles are much flatter in an established company as many projects are in different stages.

Also, while it is true that the one drug candidate that makes it to market is usually made by one chemist drug discovery is a team sport. You may not need C-class players but there is a need for a mix of A's and B's, so when a company lets go of all B's the remaining A's can become like a herd of cats.

I was at OxyChem in 2001 when they exited specialty chemicals, laid off the entire research staff, closed the building and disassembled the entire Niagara Falls plant and sold it to China. unlike engineers, there was no chance they would get back into specialties.

This practice was really popular in Germany during their downturn and worked extremely well according to companies and employees. After the downturn ended, the companies had the workers they needed, and people simple spent a bit less, waiting out the bad times. The way a lot of companies there did it though, is by cutting a day of work from people so they got 20% cuts if it's 4 days a month (or 2 if it's 10%) and everyone affected got a three day weekend. There are reports of people being really happy about it. Someone told a friend of mine that they basically went on a lot of two day camping trips and still had a weekend day to clean the house/do shopping, or just a weekend day when kids were at school and not bothering them, and in many cases they wished this arrangement would continue for a bit longer, even though the cut in pay sucked.